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I am not a Certified Public Accountant, Nor do I play Paul Thomas on the internet.
I am not an Enrolled Agent, Nor do I play Richard Macdonald on the internet.
Go look it up for yourself.

U.S. Federal Income Tax

Subjugation by taxation

Page 2580 House Congressional Record March 27, 1943

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      What follows is a transcription of the house record.  Thanks to whomever put this scan on the internet:

After a lapse of about a quarter of a century, Congress again passed an income-tax law.  The act of 1894 provided for a tax to be levied, collected, and paid "from and after" January 1, 1895, "and until the 1st. day of January 1900" (sec. 27)  Like the Civil War acts it provided that the tax should be based on the "income received in the preceding calendar year." Although the Supreme Court held this portion of the act to be unconstitutional, it still recognized that the income tax was in essence an excise tax.  The Court said that a tax on income from business, privileges or employments standing by itself, would be valid as an excise tax; but the tax on investment income was held to be invalid because the Court regarded a tax based on income from property as a tax on the property itself and therefore a direct tax which must be apportioned among the States (Pollock v. Farmers Loan and Trust Co. (1895)). 

        Excise tax and privilege tax are synonymous. The "employments" referred to are "privileged" employments.

The Court said that to sustain a portion of the tax while declaring the rest invalid, "would leave the burden of the tax to be borne by professions, trades, employments, or vocations; and in that way what was intended as a tax on capital would remain, in substance, a tax on occupations and labor.  We cannot believe that such was the intention of Congress". So the entire portion of the act relating to income tax was declared invalid.

        That would be "privileged" occupations and labor.

There are still those who think that in this case the Court went further than necessary in treating a tax based on income from property as a tax on property itself, and that in any event the excise-tax principle should have been applied to rents and other investment income, as was done under the Civil War acts.  In other words, the making and holding of investments, while perhaps not technically a business, is, at least, a kind of activity or privilege which can properly be subjected to an excise tax measured by reference to the income derived therefrom.

        A "Return on Investment" tax - "a tax based on income from property".  Returns on investment is a privilege, thus a tax on such privilege is an "excise" (privilege) tax.

That investment income may be included as a part of the basis for measuring an excise tax was recognized by Congress in the act of August 5, 1909.  This act provided, "That every corporation * * * shall be subject to pay annually a special excise tax with respect to the carrying on of doing business by such corporation, * * * equivalent to a 1 percent upon the entire net income over and above $5,000 received by it from all sources during such year, exclusive of amounts received by it as dividends upon stock and other corporations * * * subject to the tax hereby imposed; * * *."  Certain corporations, such as religious, charitable, and educational organizations, etc., were specifically exempted from the tax.

        As noted on the previous page, a corporate dividend is a "return" on the "investement" of capital used in purchasing corporate stock shares.

The tax imposed by this act was really an income tax in that it was based upon net income, but was given the correct designation of "excise tax".  It was imposed with respect to carrying on or doing business; and it should be noted that the basis was net income from all sources, except dividends from other corporations subject to the tax.  Such dividends were excepted not because they constituted investment income but because they represented income which had already been taxed.  The sole test of taxability under this act was whether a corporation was engaged in business.   If it was so engaged, then all the income (except dividends), including investment income, was used in measuring the tax.  The Supreme Court held that the fact that the tax was measured by net income, and that income from nontaxable property or property not used in business was included in computing net income, did not prevent the tax from being construed as an excise tax which did not require apportionment. Flint v. Stone Tracy Co. et al. (1911)

        "The sole test of taxability under this act was whether a corporation was engaged in business" which is the end result of my examination of the Flint v. Stone Tracy, Stratton's Independence, LTD. v. Howbert, and Doyle v. Mitchell Bros cases.

So far as the objections raised in the Pollock case are concerned, the principle applied to corporations under the act of 1909 with the approval of the Supreme Court might have been extended to individuals engaged in business.  In that way investment income of individuals as well as corporations could doubtless have been brought under the terms of the act.  And the field of income could have been completely covered by applying the principle that ownership and management of investment property is an activity or privilege with respect to which Congress may impose an excise.

        "Investment income".  Return on investment.  Gain or profit from invested property.

However that may be, Congress chose to remove all doubt by an amendment to the Constitution.  The resolution embodying the proposed amendment was deposited in the Department of State on July 31, 1909, a few days before the act of 1909 was approved by the President.  The amendment was duly ratified and became effective as the sixteenth amendment on February 25, 1913.

        What has not been covered is that the 1894 Tax Act attempted to tax returns on investment.  In the Pollock v. Farmer's Trust case,  the Supreme Court in effect, said that to tax the return on investment is the same as to tax the investment and such a tax is a Direct Tax, and the tax in question was not laid according to the rule of apportionment.

       Whether the amendment was duly ratified is questionable.  THE LAW THAT NEVER WAS is a book written by a person that is alleged to have investigated the issue and found irrefutable proof that Philander Knox, then a Cabinet Secretary, is just as crooked as today's politicians.

The sixteenth amendment authorizes the taxation of income "from whatever source derived" -- thus taking in investment income --"without apportionment among the several States."  The Supreme Court has held that the sixteenth amendment did not extend the taxing power of the United States to new or excepted subjects but merely removed the necessity which might otherwise exist for an apportionment among the States of taxes laid on income whether it be derived from one source or another. So the amendment made it possible to bring investment income within the scope of a general income-tax law, but did not change the character of the taxIt is still fundamentally an excise or duty with respect to the privilege of carrying on any activity or owning any property which produces income.

        This ties up a set of loose ends that will be addressed on the following page.

The income tax is, therefor, not a tax on income as such, It is an excise tax with respect to certain activities and privileges which is measured by reference to the income they produceThe income is not the subject of the tax: it is the basis for determining the amount of tax.

       Parse: The income is not the subject of the tax: it is the basis for determining the amount of [excise or privilege] tax.

        What privilege do you exercise when you receive compensation for labor?

        My original source of page 2580 is a jpeg scanned image.  If you want to copy and save that jpeg image click here. Opens in a new window. Just close it when you are done.

        I have a second source of page 2580. This second source also contains pages 2579 & 2581.
Cong_Record_1943.pdf  586 kb.

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